Trump’s instincts were apparently to reappoint Yellen, but his aides talked him out of it. This is one of those rare cases where he should have gone with his instincts. He replaced a highly qualified woman with a far less qualified man, and is hoping that that the less qualified man does the exact same policy as the highly qualified woman. How does that make sense? (BTW, I think Powell will do fine in the short run.)

Progressives are bashing the new tax plan as being highly regressive, but I’m not buying it:

1. They claim that corporate tax cuts benefit the rich. Actually they benefit everyone. Do you seriously think all these left wing welfare states in Northern Europe would have slashed their corporate income taxes (and in the case of Sweden abolished inheritance taxes) if these moves merely helped the rich? No one knows the tax incidence of the corporate income tax, but I suspect it’s pretty broadly shared.

2. The inheritance tax is almost certainly not going to be repealed. The Dems reinstated it last time the GOP tried to repeal it, and President Sanders/Warren will do the same. I think the GOP knows this deep down, which is one reason the repeal was put off to 2024.

3. The plan keeps the top federal income tax rate at 43.4%! How weird is that? After all the discussion of the need for supply-side tax reforms in the GOP, there is no cut in the top rate. Obama wins! (Just as with Obamacare.) And still the progressives complain.

4. They’ll point to the fact that rich people below the top rate get tax cuts. Some do, some don’t. Our (upper middle class) family’s marginal tax rate will rise from 43.0% to 48.1% under the new tax plan. I’d like Arthur Laffer to explain to me how this will motivate my wife and I to work more hours. No cut in the capital gains rate, which was raised sharply by Obama. How does that motivate me to invest more? I just don’t get it. And ours is not that unusual a family in southern Orange County. There will be lots of families that face higher marginal tax rates, while the MTR on working class families (up to $90,000) falls from 15% to 12%. So no, this is not a highly regressive plan by GOP standards.

[My estimate of the top rate for 2017 is the California tax rate of 6.2% (after federal deduction), plus 33% plus 3.8%). For 2018 it’s 9.3% California income tax (because no deduction), plus 35% plus 3.8%. Someone tell me if this is wrong.]

5. Last month we put a $1000 down payment on a new Tesla. We will now lose the $7000 tax credit. Meanwhile Trump will do just fine:

There are several proposals in this plan that would directly benefit President Trump’s family.

Currently, owners of “pass-through” companies, like LLCs, partnerships, sole proprietorships, and S corporations — the Trump Organization, for example — are taxed as personal income. The Republicans proposal offers a new low tax rate for owners, at 25 percent, a substantial cut from what is typically taxed at 36.9 percent.

The Trump Organization is a large pass-through; it owns golf courses and hotels and pulls in about $9.5 billion in annual revenue. But because it is exempt from the corporate income tax, and its profits are instead taxed upon distribution to shareholders, this new low pass-through rate is a huge win for the Trump family — and the many other businesspeople who structure their companies like this. . . .

Another provision in this bill would also directly benefit Trump’s family. While most companies would have a new limit on interest deductions — capped at 30 percent of earnings before interest and taxes — real estate firms and small businesses would be exempt.

Become president to cut your taxes.

One of my biggest disappointments is that they did not equalize the treatment of debt and equity financed investments. Interest can still be deducted, but not dividends. Also, they did not eliminate the marriage penalty, which is a disgrace.

However . . . the tax proposal contains lots of real reform, more than I expected. If it passes as is (a big if) it would make our tax system far simpler for most people. Most people would simply take the standard deduction. The truly evil AMT would be abolished. I could do my taxes again! Investments are expensed; no complicated depreciation schedules. These are amazingly good reforms. Best of all, the deductions for mortgage interest and state and local taxes would be so weakened that they could easily be eliminated in a future reform. There would be little left to protect. That makes me think this is too good to be true, and the reform parts of the plan won’t go through. I hope I’m wrong.

One other thing. Whereas the Dems will bring back the inheritance tax, I don’t think they’d unwind the “tax simplification” reforms. If we can get those through Congress, I think they would stick. Yes, other complications will be added over time, but the biggies are getting rid of itemizing and getting rid of the AMT. We have an insane system (which other countries don’t have) and it has to end at some point. Just end the misery. Please.

PS. People ask about my ideal tax system:

1. No personal or corporate income taxes. No inheritance tax.

2. A VAT where the poor pay nothing (due to a rebate of the VAT times poverty level income.).

3. A steeply progressive payroll tax. People who are self-employed or form corporations to avoid tax have their income treated as wage income. Investments are expensed. Low wage workers get wage subsidies. No universal basic income (except the VAT rebate).

4. A progressive property tax. (The opposite of the current property tax, which has much lower rates on NYC mansions than ordinary homes.)

5. A carbon tax.

This system of multiple taxes raises enough revenue, without requiring the sort of high rates that a single system would require. You don’t want a 50% VAT, tax evasion would be massive.

We can have a consumption tax system that is highly progressive, simple and efficient. So let’s stop bickering and do it.

>If it passes as is (a big if) it would make our tax system far simpler for most people.

Scott, you haven’t looked closely enough at the pass-through changes. The anti-abuse rules will be complicated to implement and have a good chance of not working; essentially we’d be adding a new set of complexity almost equal to that of the corporate tax code, with significant opportunities to game the system to disguise labor income as capital income.

If interest cannot be deducted, why can rents be deducted? I mean it’s still getting an asset for a period of time. Or is cash the only form of capital? What is the difference between signing a long term commerical lease (so no break-up clauses) on a building and buying a property using a mortgage? It’s not so uncommon to commit real assets in a company.

If you don’t know the true incidence of corporate taxes, how do you know that it favors debt? People receving interest pay taxes on it. Can we determine the incidence of those taxes better than corporate taxes? The entire argument makes no sense…

And if you state that cutting corporate taxes will improve wages because workers pay corporate taxes, you cannot believe at the same time that they push shareholders towards issuing more debt, since you just argued they are not actually paying them. Or at least you need to argue that everyone is entirely irrational…

Hmmm. So my advice to Scott after Trump was elected, was to write an open letter to him in the WSJ about monetary policy, and why interest rates are not ‘the price of money.’ Let’s hope it’s not, ‘close barn door….’

Anyway, Arthur Burns was an economist (Milton Friedman’s friend, at least for awhile) who didn’t exactly do the profession proud while Fed Chair, but Greenspan never completed his academic economics training, and succeeded spectacularly.

Combine ideal taxes 2-4. A steeply progressive VAT by means of an instant rebate card that keeps track of your spending total, applying a lower rebate as cumulative spending increases. Turn #4 into a land value tax instead. Plus use taxes, the most significant of which would be a tire tax to replace the current gas tax.

I also don’t get why you write “No personal […] income tax” and then later you want a “steeply progressive payroll tax”. So wages aren’t income?

I know that you don’t want a capital income tax and I agreed with you for a while because of incentives to investment and no double taxing and so on. But by now I think: We got double taxes everywhere (payroll tax + consumption, hello? , not the mention that a zero capital income tax is perceived as deeply unfair, and maybe rightly so. I know people whose daddy made it big, their only “qualification” is being a child of a rich daddy, their only income is capital, they never really worked their whole life, and now these spoiled children are supposed to pay zero inheritance and capital income tax? It’s hard to explain why such a system would make sense.

Rarely disagree with scott. But I think he’s off on taxes though I have my biases since my tax situations are set up for the prior regime.

I do think SALT taxes should be deductible. State gets first crack at your income. Historically we are a nation of states. But a lot of us have high incomes and these taxes are a cost of doing business. I will take significant losses both in property value and taxes because of this.

You do need to have a corporate tax. A lot of foreign ownership of US corporations so its a way to capture that income. Along with keeping taxes uniform across different streams helps to mitigate tax arbitrage strategies. It is too difficult to figure out what is capital return and what is a labor return in a lot of situations.

Ok here is my question how will cutting corporate taxes help me? they will not hire more people (its pretty simple they only people if they have demand that they cant support with current staff its not taxes that stop that, otherwise explain how in the 50s GM had 8 – 9 times more workers than today. its not all automation ) . i too arent looking forward to the e-car credit going away. now i do wonder do we really want to federalize all taxes? also why do we call NY and CA high tax states, when its really high propriety values driving high taxes rates in ‘low’ tax states aren’t lower, just values are. And for a new CA resident they are higher than for long time residents

Pretty much agree with most of what you said. Not perfect, but I think a pretty savvy plan politically.

1. A lot of business is done through pass-throughs so there’s already no double taxation of dividends on a big chunk of corporate income.

2. Nobody likes the inheritance tax. Dems are totally complicit in allowing GRATS, SLATS, Charitable Remainder Trusts, etc. that heretofore have effectively gutted the inheritance tax. Last time the GOP had to sunset the inheritance tax cuts so it went away on its own (the Democrats did not repeal it.) This time according to the plan it will be a permanent elimination and much harder to bring back. Dems only pay lip service to inheritance tax, they’ll be happy when they can ignore it and don’t have to piss off their rich donors.

3. Agree on property taxes. Eliminating the SALT deduction will push states and local govs to more reliance on property tax. Also good they’re eliminating the deduction for mortgages for rich people. This will ease consumption inequality.

4. If you’re a high end condo developer, this is not a good tax plan.

5. I’ve read the bill. They’ve done a lot to protect against converting wage income into pass through income…. but they will never be completely successful and I think it’s a fools missions. The distinction between human and physical capital is a false one invented by economists.

6. That said, I like the fact they kept the very high rates on wage incomes. Most of the people this affects are parasites whose high wages depending on government restrictions on competition. Productive rich people will mostly see lower taxes through the reduced rates on pass throughs.

7. I would have liked to seen a lower cap gains tax rate.

8. Everyone is ignoring the elephant in the room…. tax free healthcare from employers.

9. As I have argued before I think a straight national sales tax with progressive property taxes funding state and local governments is the way to go. Eliminate all taxes on income. Your concerns with tax evasion are overblown.

10. Overall I think the plan architects did a pretty good job of coming up a practical plan that accomplishes a lot….not ideal for me personally….. but pretty good for the country.

“The anti-abuse rules will be complicated to implement and have a good chance of not working; essentially we’d be adding a new set of complexity almost equal to that of the corporate tax code, with significant opportunities to game the system to disguise labor income as capital income”

I’d like to add to this excellent comment. Like other areas of the tax code that allow for “judgement” or have multi criteria guidelines, the taxpayer will always feel (be!) screwed. If you want to be 100% sure that you are in compliance, you can be 100% sure you are over-paying. And it’s not like you can call the IRS for guidance – if you call 3 times, you’ll get 3 different answers. For fun, go look up the guidelines to confirm if someone can be considered a contractor vs employee. I say this as someone who has chosen to be a sucker and pay the highest amounts. 🙁

Scott – you probably have under-estimated your MTRs. Did you account for the phase outs of personal exemptions and for deductions?

Also, get ready for some backlash over “At first glance, that looks plausible. The federal funds rate — that is, the interest rate targeted by the Fed that banks charge each other for loans — fell from 5.25 percent in July 2007 to 2 percent in May 2008. Non-economists might see this as a policy by the Fed of easy money. But in fact, policy was getting much tighter during that time. Rates did not fall because of anything the Fed did; indeed, the Fed did not inject any new money into the economy over that 10-month period. Rather rates fell because the economy was weakening rapidly during the financial crisis. The Fed failed to cut its interest rate target fast enough to reflect this weakness, and hence we tipped into recession” when multiple FOMC statements read “The Federal Open Market Committee decided today to lower its target for the federal funds rate …”.

1. Would have preferred Yellen be reappointed. I can see the political reasons why reappointing her would’ve been difficult, yet that throws into question the so-called “independence” of the Fed. If someone does an amazing job at the Fed and is qualified, that doesn’t matter as much as the party that appointed them?
2. I read your opinion article. I agree overall, although I believe you could’ve made your argument better by pointing out that market-determined rates fell faster than the Fed rate 2007-2008. You’ve done that before, but omitted that exact argument in your article (you implied it instead which appears to have confused some readers).
3. The tax “reform” is less reform and more tax cut, yet still better than feared. As you wrote, I predict that many of the reforms will be diminished or removed by the time a final bill emerges. Let’s not ignore that the Senate bill will be more conservative and less ambitious than the House bill (for reasons of deficit hawks/senate budget rules). I specifically see the SALT deduction and Mortgage deduction falling to determined opposition and being capped at higher levels. The 10% income healthcare deduction and permanent corporate tax cut will not happen.
4. A specific issue I see is that the Senate tax bill will either need to mandate cuts to entitlements, or expire after 10 years.

During the next few months we are gonna see multiple changes, carve-outs, and backroom deals that diminish the good parts of this tax bill and further complicate the tax code overall.
Historically, Reagan’s comprehensive tax reform took three years and a very popular president to pass. There’s no way this bill will be passed until sometime midway through next year.
Then again, in the era of big deficit Republicans and Trump, who knows.

Alex, You may be right, I have not studied that issue. But most people don’t face the pass through issue. It sounds like they made business taxes too complicated.

acararro. The issue is that interest can be deducted while dividends cannot. There is no reason to favor debt over equity.

I have no problem with allowing both to be deducted, as long as the treatment is equalized.

Patrick, Didn’t I say that Greenspan and Volcker were both economists, and both quite effective? Powell is a lawyer.

John, You want the government keeping track of your spending? Seriously?

Christian, Please take a class on public finance. It’s painful to read your comment.

Sean, Allowing SALT deductions is an insane idea. Our whole tax system is insane. Try looking at what other countries. There are lots of countries where the tax authorities do make make your life a living hell. It doesn’t have to be this way.

If in doubt whether it’s labor or capital income, treat it as labor income. Period.

Carl, A labor tax doesn’t double tax saving (as an income tax does.)

dtoh and Steve, Yes, the tax free nature of health care is the great evil of our 21st century public policy. It’s making my life miserable right now, as I waste lots of time fighting with insurance companies. I believe that in heaven people get to pay for health care out of pocket.

But if they can go after the home mortgage deduction, maybe in the future they can go after health care. We can hope.

Kevin. I don’t see why.

D. So where did you study economics? You think these benefits are gifts from corporations? They are just giving us free health care? Seriously?

Bill, I completely agree, and yes, my MTR is undoubtedly even higher.

Alec, I’m not surprised that some readers are confused, their knowledge of monetary economics comes from the media.

“replaced a highly qualified woman with a far less qualified man”. Nothing there about her being, you know, good at the job … I have nothing against Yelled, but if your best argument for her is her resume before she got the job …

Pass throughs – 90% of businesses in the U.S. are pass throughs. They generate more than 50% of all business incomes and employ more than 50% of the workforce. Their dividends are exempt from taxation. This make the the dividend taxation problem not so big.

Anonymity of purchases with a card based consumption/sales tax – Just have a card that exempts your first $10k of purchases on the card. Once the balance on the card is used up. Individuals are subject to a 25% sales tax. If you want to make an anonymous purchase, don’t use the card and pay the tax.

Why tax labor? Again you’re making a false distinction between labor and capital. Why have the whole bureaucracy of the IRS just to implement a wage tax. Also there is no economic reason for taxing labor. The only reason you want to keep a wage tax is because you want a progressive consumption tax and you think that the only way to implement it by taxing wages and exempting savings. That’s blindered thinking. Much easier to eliminate ALL incomes tax and just tax personal consumption directly with a national sales tax (business purchases exempted.)

On taxes, the best way to limit the mortgage interest deduction is by time. Grandfather all current mortgages in. The deduction for 30 year loans should only be for first time home buyers. Then when you refinance, to keep the deduction, you can’t extend the term or take cash out.

Second time home buyers, should be limited to 15 year loans and have to roll over all the equity from the previous home. That would save a lot of money for the government, and return the deduction to the original purpose of building equity and wealth rather than debt.

With the savings, make dividends deductible, so all corporations could be pass-through if they want, tax them as ordinary income for individuals, and make the traditional deductible IRA unlimited.

Off Topic, did you see that both President Bushes confirmed they oppose Trump:

“Bernanke was a distinguished economist and the worst disaster of a Fed Chair that we have ever had.”

That’s just silly.

You said:

“the argument that we need an academic is not a very good one. ”

Nobody ever said we needed an academic. I said we needed an expert on monetary policy. Is it so outrageous to want an expert when given a very important task to do? Would you be happy with a plumber doing brain surgery on you? After all, they are not an “academic”.

Actually, 4 of the past 5 GOP presidential candidates refused to vote for Trump. That’s mindboggling, but it was hardly noticed. Imagine if that had been true on the Democratic side. We live in a completely crazy world, and people pretend it’s normal.

Scott, benefits came from WW2 when wages were controlled, and it was the only way they could keep their workforce (it was also cheaper that wages too). but going back to those days would not make wages go up, nor would it increase hiring. and removing all benefits from employment will not make health care better (will make it much worse), nor will it help in thers. and while havent been an economist have worked in the private sector for more than 30 years, how long have you worked in the private sector?

Scott,
The term I use for that phenomenon is “hyper-normalization”. What use to be absurd and mindboggling is now treated as normal.
And yes, most people, including monetary economists, still don’t get that the market-based interest rates predicted a recession almost a year before the Fed did. These rates were based upon…. NGDP growth falling dramatically from 6% to 1% July 2007-April 2008.

dtoh,
Bernanke may have made numerous mistakes (which were very difficult to predict); but if most of the other governors on that board had been in his position, we’d be worse off today.

Did anyone notice that the GOP partially ditched the territorial taxation policy? I believe they replaced it with a clusterf*ck of three different royalties/fees/taxes.

1. If you measure Fed Chair malpractice by lost output, there is no question whatsoever that Bernanke was by far and away the absolute worst Fed Chair in our lifetimes. There is absolutely no excuse for Bernanke.

2. I have no idea if Powell will be good or bad. Probably not great…. but I don’t know of anyone who would be great (well except maybe Scott might be decent.)

3. I keep saying we should have an iphone app for administering monetary policy.

4. My expectation of Fed behavior (regardless of who’s Chair) is a) it will never do anything drastic (even when drastic action is needed), b) it will gradually ease if market sentiment is negative, and c) it will gradually tighten if the markets stay strong for an extended period of time. (The Dtoh Rule.)

The more I think about this the more I’m getting pissed off. No you don’t need an “expert.” All you need is someone who will buy more assets when you’re below your target(s) and sell assets when you’re above your target. How frigging hard is that? It certainly doesn’t require an expert.

How can anyone possibly argue that Bernanke was anything other than a completely inept nincompoop?

And dtoh, a little too much to expect the Fed to be perfect. Gotta know the target and have clout. They rarely have either. How do you completely control an entire $20 trillion output economy and a vastly larger financial sector by changing one price (the interest rate)? You know what Scott says: ‘don’t reason from a price change’ (sorry Scott)
We seem to forget that prices are a result of communication. If communication breaks down everywhere you’re going to lose some output.
I don’t think it’s completely Bernanke’s fault. An economy’s gonna do what an economy’s gonna do.

You said this before and I asked you if you think companies are just providing these benefits as a gift. You didn’t answer, but repeated the absurd claim. Please, just go away and stop commenting here. You are not welcome here.

dtoh, You said:

“The more I think about this the more I’m getting pissed off. No you don’t need an “expert.” All you need is someone who will buy more assets when you’re below your target(s) and sell assets when you’re above your target. How frigging hard is that? It certainly doesn’t require an expert.”

That’s why you need an expert, there is much more to monetary policy than buying assets. How many assets do you need to buy? How do you prevent overshooting the target? Japan has bought lots of assets, why haven’t they hit their target.

ssumner, Well, if you happen to be “friends” with Eliezer Yudkowsky on facebook.com I think you can just look for the original post in his FB history or something. Otherwise it’s easiest to just drop him an e-mail, and he’ll likely let you know! But one could even say that it was first “posted” publicly/”officially” on the date you see in that link – after all, not everyone is on FB, and even fewer people “follow” E. Yudkowsky there!

That’s why you need an expert, there is much more to monetary policy than buying assets. How many assets do you need to buy? How do you prevent overshooting the target? Japan has bought lots of assets, why haven’t they hit their target.

Re-read the Yudkowsky post. Aint’t that hard.

As to Japan. Again….Re-read the Yudkowsky post. Also it doesn’t do any good for the Bank of Japan to buy assets from other banks. If new money just ends up as excess reserves, it has no impact. They need to buy assets from the non-banking sector.

“If new money just ends up as excess reserves, it has no impact. They need to buy assets from the non-banking sector.”

I don’t agree.

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Welcome to a new blog on the endlessly perplexing problem of monetary policy. You’ll quickly notice that I am not a natural blogger, yet I feel compelled by recent events to give it a shot. Read more...

Bio

My name is Scott Sumner and I have taught economics at Bentley University for the past 27 years. I earned a BA in economics at Wisconsin and a PhD at Chicago. My research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. I had just begun research on the relationship between cultural values and neoliberal reforms, when I got pulled back into monetary economics by the current crisis.